Have you ever heard of a solo 401k? When does it make sense to use one? Are there any times when you shouldn’t use it? Chris Miles welcomes this episode’s guest to help us strategize where you can place your money. Today, Daniel Blue, Owner of Quest Education, reveals the good, the bad, and the ugly about how solo 401ks work. Daniel also taps into the myths people have about 401k. Learn more now!
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What Are The Pros And Cons Of A Solo 401k With Daniel Blue
I have a guest that I’m excited to bring on. Not only because he’s doing some amazing stuff and the guy is achieving amazing things not just in business but in his personal life as well, but he’s got a great topic that many of you will ask about from time to time which is solo 401(k)s. Should we do them? How do they work? What’s the difference between that and a self-directed IRA? What’s the difference between that and having your work 401(k)? Many of you don’t realize this, but your work 401(k) is locked up. You can’t do anything with it. That ticks you off when you realize that you don’t own and control it. That’s different when we talk about solo 401(k)s.
I’m bringing on here Daniel Blue. Not only he’s a regular contributor at Forbes, but he’s also the owner of Quest Education. This is a company that helps entrepreneurs obtain capital for their companies, pay off high-interest debt, and also be able to have self-directed managed accounts, which you can invest in things like real estate investing and other alternative assets.
With over ten years of educating small business owners, he has a knack for helping individuals get creative with their finances which leads to life-changing results. Under his leadership, Quest Education has reached the seven-figure mark two years in a row with thousands of customers throughout the United States. Daniel is based right out of Las Vegas, Nevada. Welcome, Daniel.
Thank you for the introduction, and it’s an honor to be here.
Give us more of your backstory. Tell us more about who Daniel is.
I got involved in sales at a young age. I dropped out of college when I was eighteen. I went to school because that’s what society told me to do, and I got into sales. I found that sales was a way that I could make some pretty decent money. I didn’t grow up with the money. I didn’t grow up with a family full of entrepreneurs.
My parents got divorced when I was twelve. My mom raised me on her own after I was twelve years old. There were some times when we struggled financially. I went into college not knowing what I wanted in life. I knew I didn’t want to be broke, and I wanted to pay my mom back because I looked up to my mom for carrying the load for so many years when my dad left.
I found myself in sales. I was in a space of real estate. A lot of people I was encountering would say things like, “I used my 401(k) to flip the house. I used my IRA to invest into a rental unit,” and I’m thinking, “How is that possible?” I thought retirement accounts were for stocks and mutual funds. The whole concept of self-directed retirement accounts and using a retirement account to invest outside the stock market in places like real estate, private businesses, precious metals, and things of that nature was exposed to me, and I thought that this is an industry I want to get into.
Certain things happen in my life, and I was able to meet certain people. The stars aligned enough for me to take that leap. I left the sales space in the real estate world. I jumped into the self-directed arena ten years ago. It’s been cool. I have worked for a company for a number of years. I learned the business. I learned from a lot of great people. I’m out here in Las Vegas, so I use a Las Vegas analogy.
I took all the chips on the table and bet on myself. I put them all in and started my own firm four years ago. It’s been a fun ride. We were talking about this, Chris, where people know a self-directed retirement account or at least have heard of it where they can control their own money and use a retirement account to invest in real estate. What a lot of people don’t know is there are other plans out there like a solo 401(k) where you could access your retirement account, penalty and tax-free, and use that money to start a business.
I know you attract a lot of people who want cashflow now or want to supplement their income. Maybe they are working a 9:00 to 5:00 job and want to quit that job. We had a gal not too long ago, she was in that bucket. She worked in corporate. She wanted to quit her job. She ended up finding an Amazon-based business where she could start generating some income, but she needed capital to fund her business. She didn’t want to get a loan to get the capital to buy the product. She needed about $20,000. She ended up having an IRA or a 401(k) from an old job. We helped her convert that account into a solo 401(k).
From there, she took out $20,000, penalty and tax-free, and used that money to buy the project for her online business. It was a five-year loan. Meaning when she took the $20,000 out of the solo 401(k), as long as she put back the money within five years, there were zero penalties and taxes on this transaction. It gave her plenty of time to get the capital, buy the inventory, make money with her business, and then replenish her retirement account. She paid back her solo 401(k) so that money can still work for her down the road in the now, but more importantly, in the present, she now has a business where she had the capital she needed to scale.
Let’s dig into that because we always hear people talking about their 401(k)’s work, but this is very different in how you are using it. There are a lot of people that want to have a business. They have been told, especially with self-directed IRAs, that you cannot use it to purchase your own business. Not for a self-directed IRA because they are like, “No, you can’t do that.” That’s the one thing that you can’t have your wine collection with your self-directed IRA and stuff, but you could buy a franchise, just not your own business. This is one way to get around that.
What you are alluding to is a prohibited transaction, and there are a few out there. You can’t use a solo 401(k) or an IRA that owns a property and then you live in it. A self-directed IRA cannot own a business that you are a managing member of. There’s got to be an arm’s length distance if the self-directed IRA or solo 401(k) owned the asset. The example I was giving and what separates a self-directed IRA from a solo 401(k) is the loan feature.A self-directed IRA cannot own a business that you are a managing member of. There's got to be arm’s length distance if the self-directed IRA or solo 401(k) owned the asset. Click To Tweet
The loan feature is a nice tool to have in your back pocket where the IRS says you can take a loan from your plant, 50% of the account value or $50,000, whichever number is less. It’s a five-year term, so the loan has to be paid back within five years. Even though you are paying yourself back the money, there’s an interest rate on the loan, and it’s prime plus 1% to 2%.
Now, we are telling our customers the interest rate’s about 6.75%. Let’s say someone’s reading this right now and have $50,000 and a 401(k) from their old job. There’s no loan feature on that 401(k) from your previous employer. If that 401(k) was with your current job, there might be a loan feature. If you’ve got a 401(k) and it’s from an old company, there’s no loan feature.
If you have an IRA, there is no loan feature, but a solo 401(k) does have the loan feature. If you end up having $60,000 in a 401(k) from your old job, and you qualify for a solo 401(k), then you can take that $60,000, convert it into the solo 401(k), 50% of $60,000 is $30,000. That’s the most you can get your hands on penalty and tax-free and use that money to fund a business or maybe pay off some high-interest-rate personal credit card debt.
We have seen a lot of success stories with that where maybe their credit card utilization rate is affecting their credit score. If they can pay down some of their high-interest-rate credit card debt, they can get their hands on a 5% line of credit at the bank or a 0% credit card. That’s huge. That’s going to save them a ton of money.
Here’s one thing that’s cool too. With a 401(k) at your employer, if you were to borrow from that, they make you pay back with every single paycheck. That’s a risk if you are in business. If you are brand-new, you need liquid cash. To give you the five years to be able to pay that back, that deadline, it might have to be a lump but you probably wouldn’t want to do a lump but you could, but it gives you that flexibility. You don’t have to pay it back month to month, which you would have to do with a loan too. For a normal loan, you would have to pay it back every single paycheck or every month.
To be super transparent, it’s a five-year term. The IRS does require that minimum quarterly payments are being made. A quarter is a lot better than a month. 1) There’s more flexibility, but 2) I see this where people kick themselves in the foot when they take a loan from their 401(k) through their job and then they quit their job two years later.
The next thing you know, they have to pay back that loan a lot of the time soon, like 30 or 60 days. If they don’t pay it back in full, then they have to claim that the money is income, and they are going to get crushed in penalties and taxes. That’s another beauty of the solo 401(k) is you get flexibility from a quarterly payment standpoint, but then you have the full five years to pay it back.
One thing I have told people is that if you have a 401(k) or old 401(k) or an IRA, and they say they don’t qualify for the solo 401(k), the good news is you could use that money still for business purposes. Cancel out the taxes because it counts as income, but you are also getting a write-off if it’s used for a business expense. You don’t necessarily avoid the 10% penalty unless you are qualifying for some economic hardship or something like that.
What’s important is the 10% penalty. That can add up over time. If you yank out $100,000, the next thing you know, it’s a $10,000 early withdrawal penalty. The main thing, and this is why I vibe well with you, and why we are a team anti-Wall Street, is there’s not one tool. There’s not one approach. A lot of these big guys at Edward Jones and Fidelity are like, “Here’s this class A mutual fund. Here’s this index fund.” That’s it. A solo 401(k) to me is a tool in the tool belt, like a self-directed IRA, a whole life insurance policy, or a real estate multi-family deal.
The solo 401(k), who it’s for is it’s for people that are entrepreneurs without any W-2 employees. If you’ve got maybe an LLC or a sole proprietorship, you could be working 9:00 to 5:00. You could still have a day job, but maybe on the side you’ve got this entrepreneurship activity going on. As long as there are not any W-2 employees in the picture, whether you are a full-time or part-time business owner, then you qualify for the solo 401(k), and it’s a plan that might get you from point A to point B, depending on what point A looks like for you.
I can already hear the question where someone’s going to ask, “If I have an employer who has a 401(k) right now and I do have this side business or side hustle where I’m a solo entrepreneur on the side, can I have both at the same time?”
Yes. Technically, if that person has an IRA or a 401(k) from a previous employer, they can still convert it into a solo 401(k). They will still have the solo 401(k) with a company like us, for example, and then still have the 401(k) with their current employer who uses Fidelity. They can still have both. They can still use the loan feature on the solo 401(k). They can use the money to invest in their business and invest in real estate. Where you want to make sure you are crossing your Ts and dotting your Is is the contributions.
You can’t max out the contributions for the solo 401(k) and your 401(k) through your job. I will give you a nerdy answer. For a solo 401(k), the maximum contribution is like $62,000 a year. A portion of that money is employee deferral. You are the employee of your own business. You can contribute right around $19,500 per year. It’s a little bit more if you are over $50,000.
You can’t max out the employee with your business and then the employee with the company you get a paycheck from. You still can take some of the income that your business makes and contribute into a solo 401(k) or something like a SEP for example. There are still some ways to get some tax deferral or some Roth status on your retirement money, but you can’t max out both.
That was one thing I was going to bring up, too. It’s the contributional limits where those come into play. The one thing that is nice with the solo 401(k) is you do have higher contributions you can do. You have money coming in. Often, we’ll have people reach out to us that are consultants, whether they have a W-2 full-time, plus they do consulting on the side where they might make another $100,000 or $200,000 a year. This could be a great way to take some of the income and funnel it through, and then that can also be used for business purposes.
Roth solo 401(k) contributions, I have seen a lot of our customers take advantage of it. You can contribute up to $62,000 a year and there’s no income restriction. With a Roth IRA, if you make more than a certain amount of money every year, you can’t contribute to a Roth IRA. That’s what the good old IRS says.
Now you can get around that with a backdoor Roth conversion and things like that. However, with the solo 401(k), it’s direct. You can make $500,000 a year. You can be a millionaire and still contribute $62,000 a year. That money could be all Roth contributions. How I like to explain Roth is let’s say you put $50,000 into a Roth solo 401(k), you are claiming that $50,000 as income. You are paying taxes on that $50,000.
However, if that $50,000 were to grow to $500,000 over a long period of time, that $500,000 is now 100% tax-free. You paid taxes on the seed, but not the harvest. If you have a spouse on the solo 401(k) tied to the plan and there’s enough income coming in, they can contribute up to $62,000 a year. Theoretically, if you are running and gunning on all cylinders, you and your spouse can contribute $62,000 a year into something like a Roth solo 401(k).
One of the biggest selling points right there is that flexibility. The only thing I know can do that is a whole life insurance policy. Again, there are pros and cons to using each. What would you say are some of the biggest misunderstandings or myths that people have about a solo 401(k)?
A lot of people think that a solo 401(k) is something that’s for the stock market. TD Ameritrade, Fidelity, Vanguard, and Edward Jones, most of those companies offer solo 401(k)s. With those plans, you can buy Apple stock or a mutual fund. Some of them may or may not have a loan feature. If you have a solo 401(k) with a Wall Street-based company, you are going to get a Wall Street menu. Picture a restaurant that’s called Wall Street. The appetizers, the entrée, and the desserts are what you see what you get. If you have a solo 401(k) with a company like ours, you get to flip the menu over and you get a different menu than you would have seen at Wall Street Restaurant.If you have a solo 401(k) with a Wall Street-based company, you are going to get a Wall Street menu. Click To Tweet
The different menu includes crypto, precious metals, private equity, real estate, private lending, and promissory notes. That’s how a lot of these bigwigs, these ultra-wealthy, have been able to make a lot of money. If you want to go down a rabbit hole, google Mitt Romney self-directed. Google Peter Thiel Roth IRA. These dudes have stashed hundreds of millions.
Peter Thiel was a couple of billion dollars in these plans. Do you think they are doing this with Apple stock? No shade to Apple. I love Apple. I got a lot of Apple products. I’m a believer in their stock, but no. They are investing in private equity. They are investing in alternative assets. This all IRS code, that’s another myth is a lot of people think, “Is this legit or legal? How come I never heard of this?”
This is IRS code. This has been around for years and years. That’s what I love and what we do. We are not financial advisors. We are not here to pitch investments, sell insurance, sell real estate, and sell anything in the sense other than the plan itself. We are here to show people that this is all googleable information. It’s all there for you. You could figure it out on your own and take down that path or you can work with a professional like Chris, myself, or a lot of other companies out there that could take you by the hand and save you a lot of time and headache.
One thing I told you is that although we talk with our clients about solo 401(k), self-directed IRAs, and things like that, and we strategize where they can place the money with investment strategies and whatnot, the thing is setting it up, and we do nothing with it. If someone asks us, “Who should we set it up with?” I’m like, “Go find a company to help you set it up.” We might give you a few options, but you do that. Something you guys do is help them set it up and then hold their hand more through that process.
It’s almost like LegalZoom. They call their assistant, and they are like, “Go to LegalZoom and set us up an entity.” That’s easy. It’s straightforward set up an entity with LegalZoom, or hire a CPA firm. You hire a tax service firm to white glove service, take you by the hand, and make life simple. That’s what we are. We are a go-to customer service education team to take people out of the hand, help them get all this setup, teach them how it works, and get them to the finish line. One con with self-directed plans is they are a little bit more cumbersome in the sense that if you have an IRA or 401(k) with Fidelity, I can log into my Fidelity account, click 100 shares of Apple, hit buy, and I’m done in 30 seconds.
It’s not quite that simple with a self-directed plan. There are more moving parts and a few more sets of paperwork. There is some of that. For people that are savvier that know these plans that have done it before, they probably don’t need a company like ours. For people that want a little bit more handholding, some customer service, some one-on-one love, and being able to call somebody, and a person in America picks up the phone, that’s where we come in.
This is a very niched thing, and there are some purposes you use it. There’s some great purpose you use it where people can knock out of it. Other times, you are like, “This is good, and I’m glad you thought the 401(k) was sexy, but maybe let’s look at another plan. Let’s look at something else that might fit with what you are trying to accomplish or what your situation is.” I love that you offer that guidance.
For sure. I didn’t even tell you this, so this is going to be a surprise for you. I want to be able to give back to your audience. I know you and I just met a couple of weeks ago, and we are already having some similarities. I know you are a stud in the running game, so I’m trying to get to your level on the running. I got a book. It’s called Blueprint To Your Best Retirement. It hit Amazon Best Seller in a few different categories. It teaches people about solo 401(k)s and how to access your money penalty and tax-free and self-directed space.
I’d love to give a copy to your audience, so when people go to my website, DanielBlue.me, hit the message. Say that you have read about me on Chris Miles’ show and you want the free book. We’ll be able to send that out to you. We’ll ship that out to you so then that way, you can take the opportunity to read the book. It’s a super simple and easy short read. I wanted to make it very simple, short, and sweet to the point so people can get done reading it, take some action, and get some results.
I appreciate that. That’s a great gift. There are people who are going to want to consume it. They are like, “I got to dig deeper into this.” There are some of you that I know are engineers that are thinking about making that launch away from your business or your company right now. You’ll need this book. Daniel, thank you for your time. It’s been very insightful.
Thank you so much for allowing me to be on your show.
You bet. Everybody else, there you have it. If you are interested in figuring out how to set these things up, check this out. You can read and study about this. At the end of the day, it’s all about what you are going to do with this information. Will you take action or you let another opportunity pass you by? That is my challenge for you. Make it a wonderful and prosperous week, and we’ll see you later.
About Daniel Blue
Daniel is a regular contributor to Forbes.com and the owner of Quest Education, a company that helps entrepreneurs obtain capital for their companies, pay off high-interest debt, and use self-directed retirement accounts to invest in alternative assets. With over 10 years of educating small business owners, Daniel has a knack for helping individuals get creative with their finances that lead to life changing results. Under Daniel’s leadership, Quest Education has reached the 7-figure mark two years in a row with a thousand customers throughout the United States.
His book “B.L.U.E. PRINT to Your Best Retirement” is an Amazon Best Seller.